10 Ways to Create Tax-Free Income

You work hard for your money. Whether it’s running your own business or working for someone else, you know that you’ve come by every penny honestly. And while you’re more than willing to pay your fair share in taxes, you don’t want to pay more than what’s absolutely necessary.

Fortunately, there are a number of ways to create tax-free income. Even if you don’t itemize deductions, you can still see significant tax savings in certain areas.

Here are some tax-free income possibilities you might consider, especially if you’re right on the cusp of a higher tax bracket:

  1. Obtain a cash rewards credit card. When you get cash back from a credit card, you might say that this is tax-free income. The key, of course, is to choose a card that you will pay off every month, and whose rewards you’ll actually earn. Some cards offer cashback on specific types of purchases (such as gas or groceries) while other cards offer general cashback rewards. The same actually goes for credit cards that provide airline miles as rewards, as well.
  2. Open a Roth IRA for your child. Let’s suppose that you want to get your child started on a retirement fund while he’s still in college. You can give him up to the amount of income he earned that year – for example, he may have made $3,000 mowing lawns over the summer. If you put $3,000 into a Roth for him, it will become $99,000 of tax-free income by the time he’s 79 (assuming a rate of 6%). You’ve created significant tax-free retirement income for him.
  3. Have a garage sale. If you can find $500 worth of old items you no longer want, that money comes in tax-free provided that the amount you’re selling those items for is less than what you paid for them. (If you make a profit, it’s technically a capital gain and you’d have to claim it on your taxes.)
  4. Have a charity garage sale. Let’s say you plan on giving $600 to your local United Way. When you have that garage sale, put up a sign that says that the proceeds will go to the United Way. Give the money to the United Way, and you’ve earned that much tax-free for a donation you were going to give anyway.
  5. Open a 529 college plan. Coming back around to your children, there’s the option of a 529 college plan. These plans let you set aside money for school for your children. They usually provide greater tax-free benefits than a Coverdell plan because there aren’t income limits as to who can have one, and most states will also give you a break on your state income tax for any money you put into the plan.
  6. Remodel homes. If you have handyman skills, consider improving homes. You can buy a home, let’s say for $100,000. You live in the home, and add $50,000 in improvements. You also do all of the improvement work yourself, perhaps $75,000 worth. If you sell the home for $225, the $75,000 in sweat equity isn’t taxed. Keep in mind also that you can profit up to $250,000 from the sale of a primary residence every two years.
  7. Give gifts to your minor children. You can gift stocks to your children, who won’t be taxed on the capital gains unless it exceeds $950. Keep in mind that there is a limit on the gifting, however.
  8. Use a Health Savings Account. An HSA is a wonderful investment, especially for a family. You can set money aside on a pre-tax basis, which then compounds tax-free as well. You can use the money to then pay medical expenses. Not all employers have these, and if you have a small business you’ll want to opt for a MERP (Medical Expense Reimbursement Plan) instead.
  9. Send in lots of rebates. When you make a purchase at a store that has a rebate, the amount you receive back isn’t subject to taxes.
  10. Look into municipal bonds. Municipal bonds are a place you can put your money in a tax-free income haven. However, understand that there are risks; around 19% of municipal bonds have defaulted over the past several years, so make sure that the municipality you’re investing in isn’t in danger of default. Be a smart shopper.

There are many ways you can create tax-free income, depending on your skills, your financial situation, your income, and your desire. Check into one of these 10 options today and reduce your overall tax burden.

Questions about tax-free income strategies or other tax saving options? Talk with a Certified Tax Coach today!

[IMAGE CREDIT: Some rights reserved by John-Morgan]

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